Non-depository financial institutions—including fintechs and other alternative lenders—may be able to apply for new Small Business Lending Company (SBLC) licenses to participate in the Small Business Administration (SBA) 7(a) Loan Program. The Biden-Harris administration recently promoted an SBA plan to issue a notice of proposed rulemaking that would lift the moratorium that has been in place since 1982 on new SBLC licenses—licenses that allow non-depository financial institutions to participate in the 7(a) Loan Program.
For fintechs and alternative lenders, becoming an SBLC and a participant in SBA's 7(a) program is an opportunity to better serve their existing small business customers, reach new customers, and expand their lending portfolio while managing risk.
Through the SBA 7(a) Loan Program, SBA seeks to increase small businesses' access to capital by guaranteeing loans made by private lenders. Under the standard 7(a) Loan Program (there are several variations and related programs), SBA offers a guaranty rate of 85% for loans up to $150,000 and 75% for loans of more than $150,000 to participating lenders. The maximum loan size under the standard program is $5 million.
SBA 7(a) Loan Program Lender Requirements
Lenders must satisfy several general criteria to participate in the 7(a) Loan Program. They must (1) have a continuing ability to evaluate, process, close, disburse, service, and liquidate small business loans; (2) be open to the public for the making of such loans (not be a financing subsidiary, engaged primarily in financing the operations of an affiliate); (3) have continuing good character and reputation; (4) be supervised and examined by a federal or state banking regulator; (5) be in good standing with SBA; and (6) operate in safe and sound condition, using commercially reasonable lending policies, procedures, and standards.
However, lenders that are not supervised or examined by a federal or state banking regulator may still participate in the 7(a) Loan Program, if they hold an SBLC license. The license authorizes lenders to make loans under the program and subjects them to SBA regulation, supervision, and examination. At the time SBA issued the moratorium on new SBLC licenses in 1982, there were 14 existing SBLC licenses. These licenses can be transferred—with SBA's prior written approval—but no new licenses have been issued since.
In addition to meeting the general criteria applicable to all 7(a) lenders, SBLCs are currently subject to additional eligibility and compliance requirements. SBLCs must be a corporation, limited liability company, or limited partnership and can only make loans under Section 7(a) or SBA guaranteed loans to intermediaries (that is, a loan under SBA's Microloan Program). SBLCs cannot control another SBLC, be controlled by another SBLC, or be under common control with another SBLC.
SBLCs must maintain an internal control policy, annual audits, specific minimum capital requirements, full-time professional management (a CEO and a chief credit/risk officer, as well as at least one other part-time professional employee), fidelity insurance, and dual control over disbursement of funds and withdrawal of securities. SBLCs are also subject to reporting and recordkeeping requirements, accounting requirements, and periodic SBA audits.
Previewing the Proposed Rulemaking
The Biden-Harris administration highlighted the proposed rule as part of its efforts to enhance racial equity by increasing financing available to underserved communities on October 4, 2022. The administration stated that the proposed rule's goal is "to grow the number of lenders that receive its loan guarantee, thus increasing small business lending, particularly in smaller-dollar and underserved markets, where borrowers are most acutely shut out of current lending." The proposed rule lifting the moratorium on new SBLCs was part of the Biden administration's Spring Regulatory Agenda, which was published on June 21, 2022.
Additional Considerations for Prospective SBLCs
Small business lenders are subject to many requirements and sources of potential compliance risk. While many states do not require a license to engage in small business lending, certain states do require licensure for small business lending activities, and some have specific required disclosures and restrictions applicable to small business lenders. In addition, the Consumer Financial Protection Bureau, pursuant to a statutory mandate, has proposed a rule that would require lenders to disclose information about their lending to small businesses. The Federal Trade Commission Act (the FTC Act) gives the Federal Trade Commission (FTC) broad authority to bring enforcement actions to stop deceptive and unfair practices by lenders and finance providers, including marketers, lead generators, servicers, and debt collectors (and, generally, state mini-FTC acts provide similar authority to state attorneys general). Furthermore, the Equal Credit Opportunity Act and Fair Credit Reporting Act may apply in some instances to small business loans.
SBA has not yet issued the notice of proposed rulemaking but may do so this fall (or later). The contours of the proposed rule will be important to examine because, as recently as December 2020, SBA has emphasized that expansion of the 7(a) Loan Program is constrained by its limited supervisory resources.
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